How You Can Use a Technical Analysis of Earnings to Make Smarter Investments

One of the easiest and simplest metrics that investors use to screen for, as well as value, stocks is the price-to-earnings ratio, better known as a stock’s P/E. Of course, on its face, a P/E is nothing more than a snapshot in time, but what if I told you it was far more complicated than that?

There are several P/Es that you need to keep in mind. Sure, there is the current P/E, which reflects a stock’s price divided by the current year’s expected earnings per share, but there are also trailing P/Es, as well as price-to-peak-earnings and price-to-trough earnings. Obtaining a stock’s price is fairly simple; after all, there is no shortage of online services — both free and paid — that share what I call the basic information about a stock. That data set includes the company’s name, ticker, share price, traded volume, average traded volume and so on. When I say basic, that’s the information that barely gets you started, and it can be found at Yahoo! Finance or even Google Finance. There is far more data to be found by culling through those and other resources, but I’m talking with you today about P/Es.

Using a simple P/E screen is one way to hunt for cheap stocks or identify overvalued ones, but what if I told you that if you weren’t careful, you could be making a big mistake when using the easy-to-calculate P/E ratio? Making this mistake could mean the difference between finding a truly inexpensive stock and misidentifying one that really isn’t.